2006 (4) TMI 202 - ITAT HYDERABAD-A

Block Assessment in search case - Levy of surcharge, is valid in a block assessment made u/s 158BC ? - block assessment in terms of section 158BA(2) r/w section 113 - whether there is a charging section under Finance Act to levy surcharge on undisclosed income of a block period - HELD THAT:- In the case of search initiated/conducted on 1-8-2001, the revenue relies upon the proviso to section 2(3) of the Finance Act, 2001 to levy surcharge, which refers to Part I of the First Schedule. Part I of the Finance Act, 2001, contains the rates of tax for the assessment year 2001-02, whereas the assessment year relevant to the date 1-8-2001 is 2002-03. In such circumstances, the levy of surcharge as per the rate specified in Part I of the First Schedule is clearly illegal as held by the Hon'ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala [1965 (12) TMI 35 - SUPREME COURT]. In that case, the assessee-company was assessed to agricultural income-tax under the Kerala Agricultural Income-tax Act, 1950, for the assessment year 1957-58. In the assessment, a surcharge at the rate of 5 per cent on the agricultural income-tax and super-tax was also levied and collected from the company under the provisions of the Kerala Surcharge on Taxes Act, 1957 (XI of 1957). The company objected to the imposition of surcharge on the ground that the law in force on April 1, 1957, should be the law applicable to the assessment for 1957-58. The Surcharge on Taxes Act came into force only from 1-9-1957, and did not have any retrospective effect.

Even if the argument of the revenue that the concepts of 'previous year', 'assessment year' as well as 'determination of income for each of the previous years' are not disturbed by the scheme of Chapter XIVB, is to be accepted, then it would logically follow that in such a situation, the total income determined in each of the previous years should be subject to levy of surcharge at the rates applicable to those very previous years only. Such a construction is against the proposition sought to be put forward by the revenue that the date of search is the triggering event for the applicability of Chapter XIVB and that it was clarified in the proviso to section 113 introduced by the Finance Act, 2002, that the rate of surcharge applicable for the date of search should be the rate that should be applied.

It may not be out of context to mention, at this juncture that the Legislature, whenever desired, specifically made a mention of the tag of surcharge accompanying the leviable tax in specific instances. For example, u/s 161 to 164A of the Income-tax Act, incomes of certain assessees, in certain circumstances were subject to tax at maximum marginal rate. The term 'Maximum Marginal Rate' has been defined in section 2(29C), brought on to the Statute Book, by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1-4-1989, as the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year. Prior to insertion of section 2(29C), the said term 'Maximum Marginal Rate' was defined on the very same lines, under the relevant provisions of sections 161 to 164A itself.

Similarly, even in the matter of quantification of penalties for concealment of income, etc. leviable under the Income-tax Act, Department goes by only the tax sought to be evaded and for that purpose does not take into account the tag of surcharge in relation to such tax sought to be evaded. The Department, which is very correctly going by the wording of the statute while quantifying the penalties for concealment of income leviable under the Act, is unjustifiably seeking to add the levy of surcharge while computing the lax in relation to undisclosed income determined in a block assessment.

Thus, we conclude that the levy of surcharge, prior to introduction of proviso to section 113 with effect from 1-6-2002, is riddled with complexity to the extent of making it unworkable and impossible to harmonise and, therefore, the levy fails.

In the result, the question referred to us by the Hon'ble President is answered in the negative, against the revenue and in favour of the assessee. Now, the matter shall go back to the concerned Division Bench to dispose of the appeal in the light of the above answer to the question referred to this Special Bench.